American Journal of Law & Medicine

Trojan drugs: counterfeit and mislabeled pharmaceuticals in the legitimate market.(Globalization of Pharmaceuticals: International Regulatory Issues)

I. INTRODUCTION

Over the past five years, there have been over 140 reported incidents of counterfeit and mislabeled drugs being sold by legitimate pharmacies in the United States. (1) Thousands of patients have consumed these medications, sometimes with dire consequences. (2) The extent of counterfeits in the legitimate market, however, is unknown. It is" certain that the detected incidents of fakes are a fraction of the total number of incidents. (3)

How did these drugs wind up in the bloodstreams of unsuspecting patients? Despite elaborate safety precautions, strict regulations and battalions of enforcement personnel, the stream of phony pharmaceuticals continues unabated. This article will consider the practical and legal dimensions of trade in Trojan drugs. (4) This paper will not consider the two major sources of counterfeit medications in the U.S.--direct importation and internet pharmacies. These routes are the subject of numerous scholarly articles (5) and the field is so vast that they deserve separate consideration. It is difficult to consider Trojan Drugs without some reference to these sources, but the reader is cautioned that the treatment of these topics in this paper is necessarily cursory.

II. THE CARLOW CASE

Michael Carlow is a scoundrel. The twice-convicted felon (6) had a penchant for the good life as defined by the standards of South Florida. After his release from prison, Carlow embarked on a new career as a pharmaceutical wholesaler. Over a five-year period, he amassed a fortune of many millions, purchased a mansion in Weston, FL, owned a garage full of exotic automobiles, and spent weekends on his yacht. (7) Pretty good for a down-and-out loser from Ohio.

Carlow had stumbled into one of the most lucrative criminal enterprises in America: drug counterfeiting. During his brief career, Carlow literally poisoned hundreds of desperately ill patients, caused drug companies millions in losses, and damaged the reputations of some of the best-known pharmacies in the country. How did he get away with it for so long? More importantly, how many of his ilk are practicing this trade today, undetected by any watchdogs of the nation's drug supply? The Carlow case is a study of the ease with which criminals can exploit the gaps in the regulatory regime governing America's drug distribution network.

Carlow started his career in the black market with brute force, stealing large quantities of pharmaceutical drugs from distributors, and then selling the goods back to the victim. (8) Even when employing this tactic, however, he was careful to set up a front company to accomplish the resale, so the transaction had a patina of legitimacy. (9) This method, however, was soon replaced with more sophisticated techniques.

* Medicaid Fraud: Carlow discovered that hundreds of HIV/AIDS patients were getting free medications under the Medicaid program in South Florida. (10) These pharmaceuticals could be extremely expensive. Carlow also recognized that many of the patients had other habits, such as drug addiction. Carlow offered these unfortunates cash for their prescriptions, which they could then use for heroin and crack cocaine. Of course, he paid only pennies on the dollar for their vials of injectables. He then laundered these drugs through a series of shell companies, and resold the medications into the legitimate wholesale chain. (11)

* Relabeling: Carlow, through an elaborate chain of phony companies located around the country, procured low-dose versions of popular oncology medications, counterfeited higher-dose labels for these goods, and resold the now more valuable merchandise to second-tier wholesalers in Florida and six other states. (12)

* Diversion: The Carlow family of companies located offshore sources for U.S.-made drugs, reimported the medications, and sold them to unquestioning dealers. In come cases, the goods were relabeled to conform to U.S. standards. (13)

Over the years, Mr. Carlow and his associates moved into wide-scale counterfeiting of such products as Lipitor. (14) His confederates notoriously operated warehouses for drug distribution in the back rooms of strip clubs, much like Tony Soprano at the Bada Bing. (15)

At its height, the Carlow Group operated more than two dozen front companies in a half-dozen states. The Group's revenues exceeded $3 million per month. (16) It is one thing to steal or to fraudulently acquire bogus (or relabeled) medication; quite another to be paid handsomely for it by legitimate dealers. How did Carlow pull this off?

The Carlow case illustrates the weaknesses in the pharmaceutical distribution chain in the United States. Although many of these infirmities exist in other industries, there are few which offer so many opportunities for fraud as prescription medications.

III. DRUG DISTRIBUTION IN THE U.S.

Unlike most industry sectors, pharmaceutical distribution in the United States is almost wholly beyond the control of manufacturers. Even the most heavily-regulated drugs pass through a distribution chain which is Byzantine in its complexity. Many of the largest pharmaceutical companies have only a handful of customers, including major wholesalers, government agencies, and extremely large users. Once the goods leave their loading docks, manufacturers have little concept of how and where their products are ultimately dispensed.

The three major wholesalers in the country--AmerisourceBergen, (17) Cardinal Health (18) and McKesson (19)--handle over 80% of the drugs sold. (20) Government agencies, such as the Veterans Administration, (21) and secondary wholesalers handle the remaining 20 percent. (22) Exported drugs, which do not generally pass through these routes, constitute another tributary in the distribution stream which is similarly opaque to the manufacturers. (23)

The major wholesalers stock thousands of drugs from hundreds of manufacturers. They procure almost all of their stock directly from producers, and sell to most pharmacies around the country. The operative words in the prior sentence are "almost" and "most". Until recently (24) all of the "majors" have purchased a portion of their stock from secondary wholesalers rather than manufacturers. These secondary wholesalers sometimes buy their drugs from the manufacturers, but often acquire pharmaceuticals from other sources. These sources include:

* "Short-dated" lots from pharmacies (or other health-care providers) which need to move merchandise before their expiration date

* Exotic medications such as antivenins which the "majors" do not want because volume is so low

* Bulk-packaged goods which they repackage in smaller bottles etc. for better commercial utility

* Reimported drugs

* Other wholesalers (25)

The primary reason the "majors" buy even a small portion of their inventory from the secondary market is price. (26) Because the secondary wholesalers would have no price advantage over their larger customers if they were procuring drugs from the same place, they compete by knowing when and where to buy discounted product.

The major distributors operate at very thin profit margins, rarely exceeding 5 percent. (27) If, however, they can purchase inventory at 10% or more below the price offered by the manufacturer, the result goes directly to the bottom line. This has traditionally been too tempting to resist for even the most ethical of companies. The secondary wholesalers, after all, are governed by the same regulatory regime as the majors, so what's the harm in making a buck or two at the expense of the manufacturers?

Unfortunately, these secondary market sales are the primary, if not exclusive means by which Trojan drugs enter the bloodstreams of the unwary.

IV. GOVERNMENT REGULATION OF PHARMACEUTICAL DISTRIBUTION

Like the distribution network itself, the regulation of pharmaceutical products in the United States is labyrinthic.

At the Federal level, at least three government agencies, the Federal Trade Commission (FTC), the Food and Drug Administration (FDA) and the Drug Enforcement Administration (DEA), have nominal jurisdiction over great swaths of the pharmaceutical industry and its components. Other regulators, ranging from the Veteran's Administration to the Agriculture Department establish policies in niches carved out of the overall regime. (28) In all, more than twenty Federal agencies have developed controls of one sort or another over pharmaceutical products. (29)

Even the lead agencies have confusing and overlapping jurisdiction.

The DEA, for example, enforces many of the country's drug laws. While their primary concern is for narcotics such as cocaine and heroin, they also enforce statutes involving prescription medications such as Oxycontin[R], and even over-the-counter cold medications such as Sudafed[R]. (30)

The FDA is nominally in charge of regulating prescription medications. It does so through elaborate qualification procedures for new drugs, and strict controls over the production of approved medications. Its jurisdiction also extends to enforcement of drug distribution channels for approved Rx drugs. (31)

The FTC is concerned with "all other" consumer products which might be misrepresented in the marketplace, such as claims that herbal nostrums are safe and effective. (32) Added to this bouillabaisse of authority are more than two score Federal police agencies. (33)

The states, however, retain authority over some of the most important components of the drug distribution chain: wholesalers, retailers and physicians. State Boards of Pharmacy regulate (on paper at least) who may participate in drug distribution within their borders. These regulations vary widely, as does the actual enforcement of the law. It is perfectly legal in Florida, for example, for a convicted felon's wife to operate a pharmaceutical wholesale operation, hiring her husband as a "consultant." (34) This was one of the scams Mr. Carlow employed to evade scrutiny in the Sunshine State. Similarly, the laxity of laws in some states makes them a honey pot for unscrupulous wheeler-dealers. Until 2002, for example, Nevada was well-known as a souk for scam artists in the wholesale drug trade. (35)

At the state level, actual enforcement of these laws is even more problematic than among the various Federal agencies. Most Boards of Pharmacy lack police power, and employ only a handful of inspectors. (36) To arrest malefactors, they must look to traditional law enforcement, which is generally ill-equipped to understand the issues involved, much less undertake vigorous investigations.

To compound the problem, cooperation between state and Federal authorities in this field is fraught with difficulty, the parties fighting each other over jurisdictional turf as often as apprehending malefactors. (37)

Finally, U.S. Attorney's offices around the country, which are charged with actually prosecuting crimes committed by pharmaceutical bandits, are ill-equipped for the mission. These cases tend to be complex and, as a result, present a significant drain on resources. Many U.S. Attorneys remain reluctant to prosecute these cases in all but the most egregious circumstances, preferring to handle the less complicated villainy which abounds in most metropolitan areas.

V. MIXED SIGNALS

If the institutional problems of maintaining a comprehensible system of pharmaceutical regulations were not enough, politicians have further complicated the issue. For the past several years, Members of Congress, (38) State Governors (39) and even mayors (40) have urged that existing barriers to importation of pharmaceuticals be loosened or abandoned altogether. The Prescription Drug Marketing Act (PDMA) is the primary source of these restrictions. (41)

The motivation for removing barriers is purportedly to reduce prescription drug costs by permitting liberal importation of medications from countries which offer considerably lower prices. Proponents of this position argue that the PDMA protects artificially high drug prices in the U.S., and raises costs to health care providers and governments alike. They also point out that the favored "alternative source" for importing drugs would be Canada, which has a record comparable to that of the U.S. in detecting counterfeits. (42)

The FDA has repeatedly testified that even with the PDMA in place, they are unable to verify the authenticity or safety of drugs which are currently entering the country. (43) They assert that if the PDMA restrictions were withdrawn, the country would be flooded with unapproved and potentially hazardous medications.

Given the inability of the FDA to even monitor illicit drugs entering the U.S. in violation of the PDIVIA, some solons have suggested that changing the law would merely make de jure that which is already de facto. (44) The pharmaceutical industry demurs, largely because most of the current imports appear to be for personal use, and comprise a minor source for the legitimate U.S. retail market. They fear repeal of the PDMA would subject them to wholesale competition from abroad. (45)

Notwithstanding the merits (or lack thereof) of the various arguments on this matter, it is clear that imported pharmaceuticals are a major source of counterfeits finding their way to legitimate pharmacy shelves in the U.S. The very existence of a debate over importation policy creates additional uncertainty in the market, and, ironically, gives questionable wholesalers a convenient argument for their activities, viz: "I did it for Granny." (46) This leaves open one of the widest doors for counterfeits to enter the U.S. marketplace.

VI. THE DIVERSION PIPELINE

As noted supra, there have been threescore cases of counterfeit drugs being discovered in the U.S. over the past 5 years. In every single case the bogus medicaments were "piggybacked" on apparently "legitimate" shipments of gray market goods. (47) Some of these, as in the Carlow case, were manufactured in the U.S. In other instances, however, the counterfeits were acquired abroad.

The international drug distribution chain is at once more straightforward and more complex than even the bizarre U.S. system. Outside the U.S., government agencies or international organizations procure most drugs. (48) In other cases, although the actual purchase and distribution of drugs may be in private hands, governments strictly control prices and terms of sale. (49) This results in various "price points" around the globe where the same medication may be sold at prices a fraction below those prevailing in the U. …

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